U.S. index futures were little changed, if slightly in the green on Wednesday as investors settled into a wait-and-see mode ahead of today's "brutal" CPI report which is expected to show the highest CPI print in nearly 40 years, a time when the fed funds rate was 11% compared to 0% now...
... and gauge the pace of Federal Reserve tightening. Consensus expects December CPI to show inflation climbing to 7.0%, a result which could see front- end fully price in a March rate hike (currently priced at 85%). Helping the overnight mood in Asia, was a moderation in China’s inflation pressures, with CPI dipping to 10.3% y/y in December, giving the central bank scope to cut interest rates to cushion the economy’s downturn just as most major nations look to tighten policy. At 730am ET, S&P futures were up 0.2% of 7.50, and Nasdaq futures rose 22 points or 0.14%, recovering toward Asia’s best levels; Dow futures were up about 0.1%. The dollar was slightly lower, extending on its recent sharp drop, while Treasury yields were steady.
“All we know is that the Fed has waited too long before taking action,” said Ipek Ozkardeskaya, senior analyst at Swissquote. “If today’s inflation print is higher than expected, recent gains in equities will melt like snow in the sun,” she wrote, even though investors seemed to put aside fears that tighter policy will stifle the economic rebound and market rally after soothing words from Federal Reserve Chair Jerome Powell. His testimony Tuesday helped arrest a five-day slide in the S&P 500, just as we predicted it would.
Powell aggressively talked back the Dec Fed meeting's initial hawkish market take. He will do the same today in the Senate after last week's minutes— zerohedge (@zerohedge) January 11, 2022
As Deutsche writes, the highlight of the last 24 hours was Chair Powell’s renomination hearing before the Senate Banking Committee. The overall communicated stance of policy wasn’t much changed with the hawkish pivot still on. Nevertheless, there were a few incremental takeaways. Powell did nothing to push back on liftoff being on the table in March, in line with our US econ team’s call and the increasing probability implied by the market, which is currently 85%. He made it clear that QE (yes it’s still happening) would finish in March, despite speculations it may come to an abrupt halt beforehand. In line with growing consensus, he painted a picture that made the start of QT likely in 2022. Finally, on the overall stance of policy, he emphasized the Fed needs to pull back from extreme levels of accommodation, but didn’t need to rush to get to a neutral stance of policy.
“It was a masterful performance really, leaving the bowls neither too full nor too shallow, but just right from the financial market’s perspective,” said Jeffrey Halley, senior market analyst at Oanda Asia Pacific, in an email. “The music can still play in equity markets in 2022, it’s just that we’ve likely seen the best of the technology gains.”
With three and possibly four Fed rate increases now priced in, strategists are turning more sanguine about inflation and focusing on positives such as the start of the earnings season. Markets have been buffeted by volatility at the start of the year on the prospect of faster interest-rate increases to subdue price pressures.
“Hawkish Fed repricing is likely largely done for now,” and “resilient earnings should help equities rebound,” Barclays Plc strategists led by Emmanuel Cau wrote in a note to clients on Wednesday.
Looking at the CPI print, DB's Jim Reid notes that repeated upside surprises in the inflation data have sent the year-on-year numbers up to multi-decade highs, putting significant pressure on the Fed. Indeed if you look at the monthly headline CPI reading, 7 of the last 9 releases have come in above the consensus estimate on Bloomberg. In terms of what to expect this time around, economists think that year-on-year CPI will rise to +7.0%, which will be the highest annual CPI number since 1982. And if that figure is realized, it would also mean that the real Fed Funds rate in December was around -7%, which for reference is lower than at any point in the 1970s, when the lowest the fed funds rate got in real terms was around -5%.
In the premarket, Dish Network Corp. rose more than 7% on a New York Post report of merger talks with DirecTV. PayPal shares dropped 1.9% in premarket trading after Jefferies cut its recommendation for the digital payments provider to hold from buy. Here are some of the biggest U.S. movers today:
- U.S.-listed Chinese stocks rally in premarket trading, as Asian listings rebound amid bargain hunting and a reassuring tone from Fed Chair Jerome Powell. Alibaba (BABA US) +2.4%, JD.com (JD US) +1.5%, Pinduoduo (PDD US) +3.3%
- Biogen (BIIB US) drops 9.1% in premarket trading after the U.S. government limited Medicare coverage of the company’s Aduhelm Alzheimer’s disease treatment and similar drugs to patients enrolled in clinical trials. The highly unusual move will curb access to the controversial treatment approved last year
- Wells Fargo (WFC US) advanced in premarket trading as Piper Sandler upgraded its rating to overweight from neutral; cuts Premier Financial to neutral from overweight
- Bed Bath & Beyond (BBBY US) shares jump as much as 4.9% in U.S. premarket trading, boosted by disclosures of insider purchases of the retailer’s stock made on Jan. 7
- Rocket Lab USA (RKLB US) started at overweight, with $17 target by Morgan Stanley, which says the company offers high-quality exposure to the space race. Stock gains 4.1% in premarket trading
- Cogent Communications (CCOI US) faces a “challenging setup” on weak growth and a high multiple, Wells Fargo writes in note as downgrades to underweight from equal-weight
European equities climbed back toward opening highs after a choppy first hour of cash trading. The Euro Stoxx 50 added 0.7%, FTSE 100 outperforms at the margin. Miners, oil & gas and tech are the strongest performing sectors. In Europe, mining and technology companies led the Stoxx 600 Index up 0.5%. Philips slumped 14%, the most in two decades, after the Dutch producer of medical equipment reported lower preliminary revenue than expected. Here are some of the biggest European movers today:
- Rexel jumps to an eight-year high after the French maker of electrical products said 2021 organic growth will be higher than forecast with Citi noting positive demand comments from firm.
- VAT shares post their steepest gains in more than a month after the Swiss supplier of products for the semiconductor industry reported 4Q order intake that was well above expectations.
- DFS Furniture shares gain as much as 6.4%, among the top advancers in the FTSE All-Share Index, after the U.K. retailer kept its FY pretax profit forecast unchanged.
- Just Eat Takeaway stock rises after initially falling following an update. Citi analysts say the online food delivery firm’s 4Q results are broadly in line with an expected deceleration.
- TeamViewer shares rise as much as 15% in Frankfurt after the company reported 4Q and FY billings that beat market expectations with RBC calling the results “reassuring.”
- Sainsbury shares rise as much as 3.9% after the U.K. grocer boosted its outlook for the year. Profit delivery is strong, according to Jefferies.
- BHP Group and European mining peers are among the biggest gainers Wednesday with UBS saying in a sector note that shares are cheap -- but valuations are not compelling.
- Sweco shares fall as much as 6.8% after Danske Bank downgrades to hold from buy, noting “stalling execution” despite solid market demand for the engineering consultancy’s services.
- Taylor Wimpey shares drop as much as 2.2% after a holder sold about 86m shares in the company at 163.75p apiece, representing a 3.7% discount to Tuesday’s close.
Earlier in the session, Asian stocks climbed to their highest level in almost seven weeks as Federal Reserve Chair Jerome Powell’s remarks spurred expectations that anticipated rate hikes won’t derail the global economic recovery. The MSCI Pacific Index added as much as 1.6% to its highest since Nov. 26, bolstered by gains in the consumer-discretionary and information-technology sectors. Alibaba Group and Tencent Holdings were among the biggest contributors to the measure’s rise. Benchmarks in Hong Kong and Japan led gains for the region. Powell pledged to do what’s necessary to contain an inflation surge and prolong the economic expansion at his confirmation hearing for a second term as U.S. central bank chief. Futures on the S&P 500 advanced in Asia trading after halting a five-day slide. A gauge of Chinese technology shares rallied after the Nasdaq 100 outperformed major benchmarks. “The market view is that containing inflation with early rate hikes will turn out to be good for the economy -- that we’ll be able to push back on inflation while keeping the economy strong,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management in Tokyo. “Before, the market had been reacting simply to the words ‘monetary tightening’.” Asia’s equity benchmark is attempting a rebound following last year’s 3.4% slump, when the gauge was hit by concerns over U.S. tightening, Covid-19 and a selloff in Chinese tech shares. Solid gains during Wednesday’s session will likely help spread a sense of relief, according to Fujiwara. “We think there’s more attractiveness here in Asia and EMs overall. And valuations are much more compelling given overall EM/Asia markets have underperformed compared to U.S. and Europe,” Ken Wong, Asian equity fund specialist at Eastspring Investments, told Bloomberg Television. “In 2022, there will be opportunities to be selective.”
Japanese equities posted their first gain in four sessions, following a similar rebound in U.S. peers after soothing comments from Federal Reserve Chair Jerome Powell. Electronics makers and telecoms were the biggest boosts to the Topix, which closed 1.6% higher. Tokyo Electron and SoftBank Group were the largest contributors to a 1.9% rise in the Nikkei 225. Powell pledged to do what’s necessary to contain an inflation surge and prolong the expansion, while steering clear of fresh details on the path of U.S. monetary policy. The S&P 500 rose for the first time in six sessions. “The market view is that containing inflation with early rate hikes will turn out to be good for the economy - that we’ll be able to push back on inflation while keeping the economy strong,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management in Tokyo. “Before, the market had been reacting simply to the words ‘monetary tightening’.”
Indian stocks rose along with Asian peers after Federal Reserve Chair Jerome Powell reassured investors that the U.S. central bank will tackle inflation to extend the economic expansion. The S&P BSE Sensex climbed for a fourth day, up 0.9% to 61,150.04 in Mumbai. The benchmark is 1% away from surpassing its record high touched in October. The NSE Nifty 50 Index advanced by a similar magnitude. Reliance Industries Ltd. rose 2.7% and was among the biggest boosts to the key indexes. Of the 30 shares on the Sensex, 24 gained. All but two of the 19 sector indexes compiled by BSE Ltd. rose, led by a gauge of telecom companies. IT major Wipro Ltd. reported net income for the third quarter that missed the average analyst estimate. Tata Consultancy Services Ltd. and Infosys Ltd. are also scheduled to announce Oct.-Dec. earnings in the day
Australian stocks also rebounded as mining shares hit 5-month highs. The S&P/ASX 200 index rose 0.7% to 7,438.90, with miners and health-care contributing the most to the benchmark’s gain. The materials subgauge led the rebound, hitting the highest since Aug. 17. Afterpay surged after the company said that Block, formerly known as Square, has now received approval from the Bank of Spain in respect of the acquisition by Lanai AU 2 Pty Ltd. Domino’s Pizza Enterprises dropped to its lowest since May. Official data Wednesday showed job vacancies climbed to a record in Australia, up 18.5% to almost 400,000 in the three months through November. In New Zealand, the S&P/NZX 50 index fell 0.2% to 12,804.48
In rates,Treasuries were marginally cheaper across the curve, with the front-end underperforming ahead of December CPI release at 8:30am ET. Treasury 2-year yields higher by 1.8bp vs. Tuesday close while rest of the curve is less than 1bp cheaper on the day; 10-year yields around 1.74% with both bunds and gilts outperforming by over 2bp in the sector. Cash USTs bear flatten, cheapening roughly 2bps across the short end. Session highlight also includes 10-year note auction, a $36b reopening: US auctions resume with a $36BN 10-year reopening at 1pm, followed by $22b 30-year reopening Thursday. The WI 10-year at around 1.745%, above auction stops since January 2020 and ~23bp cheaper than December stop-out which tailed 0.4bp. Elsewhere, bunds and gilts drift higher, with the 10y point outperforming. Bund futures regain 170. Peripheral spreads tighten slightly.
In FX, most G-10 currencies were confined to narrow ranges after the dollar’s drop yesterday and the Bloomberg Dollar Spot Index hovered while the Treasury curve bear-flattened as yields rose by up to 2bps, while commodity currencies outperform but trade off best levels with G-10 FX generally trading narrow ranges.
Demand for long gamma exposure into the next Federal Reserve meeting remains subdued even as realized volatility stays relatively high. The Norwegian krone was the best G-10 performer, followed by the Canadian dollar, as oil steadied above $81 barrel after posting the biggest one-day surge this year as investors embraced risk assets, commodities climbed and industry estimates pointed to another drawdown in U.S. crude stockpiles. The euro moved in a tight $1.1355-1.1378 range and Bund yields inched lower, led by the belly of the curve. The pound treaded water as investors monitored London hospital admissions for any signs of an easing in pandemic pressures and questioned how much further the currency can rise when rate hikes are already priced in.Australian dollar edged up amid iron ore hitting a three-month high as heavy rains disrupted southeastern Brazil’s iron ore industry. Japanese government bonds rallied across maturities after a smooth five-year note auction, driving down benchmark 10-year yields from a 10-month high and the yen steadied. BOJ Governor Haruhiko Kuroda said he expects the country’s underlying inflation to pick up gradually over the long-term after moderate near-term gains led by energy prices.
In commodities, crude futures fade a modest push higher. WTI stalls after a test of $82, Brent trades near $84. Spot gold drifts slightly lower near $1,817/oz. Base metals are in the green with LME nickel up 4%. Bitcoin jumped back over $43K while ether was above $3,300.
Looking at the day ahead now, and the aforementioned US CPI release for December will be the highlight. Other data releases include Euro Area industrial production for November and the US monthly budget statement for December. From central banks, the Fed will be releasing their Beige Book, and speakers include BoE Deputy Governor Cunliffe and the Fed’s Kashkari.
- S&P 500 futures up 0.1% to 4,710.50
- STOXX Europe 600 up 0.5% to 485.30
- MXAP up 1.6% to 196.29
- MXAPJ up 1.6% to 641.50
- Nikkei up 1.9% to 28,765.66
- Topix up 1.6% to 2,019.36
- Hang Seng Index up 2.8% to 24,402.17
- Shanghai Composite up 0.8% to 3,597.43
- Sensex up 1.0% to 61,200.72
- Australia S&P/ASX 200 up 0.7% to 7,438.90
- Kospi up 1.5% to 2,972.48
- German 10Y yield little changed at -0.04%
- Euro little changed at $1.1370
- Brent Futures up 0.5% to $84.17/bbl
- Gold spot down 0.3% to $1,815.68
- U.S. Dollar Index little changed at 95.59
Top Overnight News from Bloomberg
- Bank of France Governor Francois Villeroy de Galhau says the European Central Bank will do what is necessary to get inflation around 2% in the medium term
- Natural gas prices are likely to remain high for the next two years, with very few options to boost supplies quickly, according to the chief executive of Britain’s biggest energy supplier
- China’s inflation pressures moderated to 10.3% y/y in December, giving the central bank scope to cut interest rates to cushion the economy’s downturn just as most major nations look to tighten policy
A more detailed look at global markets courtesy of Newsquawk
Asia-Pac bourses traded positively as stocks took their cue from the energy and tech-led gains in the US where sentiment was underpinned as yields eased and focus centred on Fed Chair Powell's confirmation hearing where he noted that the Fed is prepared to act to control inflation if required but refrained from ramping up the hawkish rhetoric. ASX 200 (+0.7%) was led higher by strength in commodity-related sectors after gold made headway above the USD 1800/oz level and WTI crude notched its biggest gain in a month, while the tech sector was also inspired following the growth and duration bias stateside. Nikkei 225 (+1.9%) was underpinned amid the broad constructive mood and recent JPY weakening with Softbank among the top performers after it was reported to have repurchased around JPY 42.9bln of shares during December. Hang Seng (+2.8%) and Shanghai Comp. (+0.8%) also benefitted from the risk momentum with the former spearheaded by tech and energy shares including CNOOC which saw an initial double-digit percentage jump due to the rally in oil prices and after it raised its production guidance for 2022. However, the gains in the mainland were modest in comparison as Chinese property developers face key bond payments this week and with participants digesting softer than expected Chinese inflation data. Finally, 10yr JGBs clawed back yesterday’s losses following a rebound in USTs and despite the heightened risk appetite, while prices briefly stalled after the 5yr JGB auction showed weaker results across all metrics although this was only momentarily with further upside on a break above the 151.00 level.
Top Asian News
- Asia Stocks Jump to Near 7-Week High After Powell’s Fed Remarks
- Primavera, ABCI Are Said to Weigh Joining Hong Kong SPAC Race
- Just Two Listings Priced in Slow Hong Kong IPO Start: ECM Watch
- China’s Credit Stabilizes as PBOC Calls For More Home Loans
Overall a positive but choppy morning for European cash equities thus far (Euro Stoxx 50 +0.7%; Stoxx 600 +0.6%), with the regional mood underpinned by the upside seen on Wall Street and then across APAC markets. The gains were attributed to Powell refraining from sounding more hawkish, while noise has also been growing regarding the possibility for China to further ease monetary policy amid domestic growth concerns. US equity futures saw some mild selling shortly after the European cash open despite a lack of fundamental catalysts, and with action contained to the equity space – potentially as players take some chips off the table ahead of US CPI and following this week’s gains. Futures are back in modest positive territory at the time of writing, with the NQ (+0.2%) back to narrowly leading and the RTY (-0.1%) the slight laggard. Back to Europe, the region also saw some modest losses in lockstep with state-side futures but mostly remained in positive territory with relatively broad-based gains. The SMI (-0.2%) lags amid the pro-cyclical/anti-defensive nature of the European sector composition, with Healthcare and Food & Beverages at the bottom of the pile – thus exerting some pressure on heavyweights Roche (-1.5%) and Nestle (-0.6%). The sectors table sees Basic Resources, Oil & Gas and Tech towards the top – the former two amid price action in their respective complexes, and the latter tracking the sectoral gains on Wall Street and APAC. Taking a look at some individual movers, Just Eat Takeaway (+2%) and Sainsbury’s (+2%) gain on the LSE following trading updates, with the latter upping its guidance in the pre-market. The other end of the spectrum sees Philips (-14%) plumbing the depths after missing forecasts and reporting higher-than-expected costs. In terms of analyst commentary, Goldman Sachs has conformed to the view that European stocks will outperform this year as the US stocks’ outlook gets dimmer against the backdrop of a hawkish Fed; “The unusually high concentration of stocks within the S&P leaves it more vulnerable to pressures coming from antitrust regulation or higher bond yields”, the analysts said
Top European News
- Gas Prices to Stay High for Next Two Years, Centrica CEO Says
- Germany Tells Banks to Rebuild Capital Buffers as Lending Booms
- Goldman’s Stehn Sees ECB Remaining Patient on Rate Hikes
- WeTransfer to Kick Off Europe Listing Window With Amsterdam IPO
In FX, the Greenback is hovering off deeper post-NFP lows in advance of CPI data that is tipped to show another acceleration in headline terms, albeit due to base effects on a y/y basis, and could rekindle hawkish Fed policy vibes that were doused somewhat by chair Powell on Tuesday. To recap, at his renomination hearing in front of the Senate Banking Committee he was noncommittal on the timing for tightening and also pushed back on the notion that running down the balance sheet is likely to start soon after, if not immediately following lift-off and the end of tapering. Looking at the Dollar index as a proxy, a partial recovery in early European trade fell a fraction short of 95.700 and 95.500 is holding on the downside as Treasury yields meander between new cycle peaks and overnight retracement troughs awaiting the second leg of this week’s auction schedule in the form of Usd 36 bn 10 year notes alongside rhetoric from former Fed dove Kashkari.
- CAD - Ongoing strength in crude prices is helping to keep the Loonie aloft, and Usd/Cad is now testing support and underlying bids around 1.2550 as a result. However, the 55 DMA comes in just below the half round number and could stall the fall as WTI encounters some resistance circa Usd 82/brl.
- EUR/AUD/NZD/CHF/JPY/GBP - All narrowly mixed, marginally softer or off peaks against their US counterpart to be precise, with the Euro easing off after breaching 1.1350 and the 55 DMA on the way to peaking at 1.1378, the Aussie back under the 10 DMA having reached 0.7223 irrespective of softer than expected Chinese inflation metrics and the Kiwi fading from just a few pips shy of 0.6800 ahead of NZ building consents. Meanwhile, the Franc is maintaining 0.9250+ status, the Yen is staying afloat of the 115.50 mark after the BoJ upgraded its outlook for all 9 Japanese regions and Sterling retains a firm grip of the 1.3600 handle even though PM Johnson’s position is looking increasingly precarious as he heads for Question Time at the Commons. Note also, from a technical perspective there are several hurdles for Cable to overcome if its scales 1.3650, as Fibs sit at 1.3675 and 1.3706, while the 200 DMA resides at 1.3737.
- SCANDI/EM - The Nok has extended gains through 10.0000 vs the Eur in wake of firmer than forecast Norwegian mainland GDP and much less contraction in the overall economy compared to the previous quarter, while the Sek has pared some losses from recent lows with encouragement from news that Sweden plans to offer compensation to households facing higher energy bills to the tune of Sek 6 bn. Elsewhere, the Rub is lagging amidst ongoing angst between Russia and the West and the Try has not really taken on board latest protestations from Turkish PM Erdogan about inflation not matching fundamentals and his promise to lower prices soon. Conversely, the softer Usd in general is propping up the Cnh and Cny following the aforementioned downturn in Chinese PPI and CPI, while the Zar is continuing its bull run regardless of Gold waning beyond Usd 1820/oz, the Czk has more hawkish remarks from CNB’s Mora to lean on and the Brl could also benefit from BCB Governor Campos Neto repeating that further is appropriate.
In commodities, WTI and Brent front-month futures initially gained following a period of consolidation in APAC hours, although recently the benchmarks have drifted off best levels. Prices are underpinned by the softer Buck heading into the US CPI metrics, with the former finding resistance at USD 82/bbl (vs low 81.17/bbl) and the latter extending above USD 84/bbl (vs low 83.52/bbl). News flow for the complex on the lighter side in the European morning. Eyes remain on the US CPI metrics, whilst China’s zero-COVID policy remains as a headwind to global demand, with China halting more flights and China's Tianjin locking down three districts due to the COVID outbreak, whilst the Dalian port also reported cases. From a data perspective, the contracts were little-swayed by the smaller-than-expected draw in Private Inventories, whilst the internals also saw a much larger-than-expected in gasoline stocks (+10.9mln vs exp. +2.4mln) but US NatGas futures remain firmer by some 4% at the time of writing. The EIA STEO yesterday meanwhile upped their 2022 oil prices forecast by almost USD 5/bbl vs last month but sees those levels falling throughout the year. In terms of geopolitics, France has poured some cold water on the recent optimism surrounding the Iranian nuclear deal, suggesting the sides are still some ways apart despite the reported progress. The Russian/Ukrainian front hasn’t seen any further developments thus far. Turning to metals, spot gold has been moving in lockstep with the Dollar and has waned off yesterday’s USD 1,822/oz best, with the downside seeing the 50 DMA (1,806), 21 DMA (1,803) and 200 DMA (1,801) ahead of the psychological USD 1,800/oz. Elsewhere, LME copper inches closer towards USD 10k/t from a USD 9,818/t intraday base, with the softer Dollar and upbeat mood in China spurring prices.
US Event Calendar
- 7am: Jan. MBA Mortgage Applications 1.4%, prior -5.6%
- 8:30am Dec. CPI data:
- 8:30am: Dec. CPI YoY, est. 7.0%, prior 6.8%; MoM, est. 0.4%, prior 0.8%
- 8:30am: Dec. CPI Ex Food and Energy YoY, est. 5.4%, prior 4.9%; MoM, est. 0.5%, prior 0.5%
- 8:30am: Dec. Real Avg Hourly Earning YoY, prior -1.9%, revised -1.7%
- 8:30am: Dec. Real Avg Weekly Earnings YoY, prior -1.9%
- 2pm: U.S. Federal Reserve Releases Beige Book
- 2pm: Dec. Monthly Budget Statement, est. -$5b, prior -$191.3b
DB's Jim Reid concludes the overnight wrap
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The highlight of the last 24 hours was Chair Powell’s renomination hearing before the Senate Banking Committee. The overall communicated stance of policy wasn’t much changed with the hawkish pivot still on. Nevertheless, there were a few incremental takeaways. Powell did nothing to push back on liftoff being on the table in March, in line with our US econ team’s call and the increasing probability implied by the market, which is currently 85%. He made it clear that QE (yes it’s still happening) would finish in March, despite speculations it may come to an abrupt halt beforehand. In line with growing consensus, he painted a picture that made the start of QT likely in 2022. Finally, on the overall stance of policy, he emphasised the Fed needs to pull back from extreme levels of accommodation, but didn’t need to rush to get to a neutral stance of policy.
All told, yields did rally with Powell after earlier climbing. Yields on 2yr Treasuries decreased -1.2bps while the 10yr dipped -2.5bps, with the bulk of declines again coming later in New York trading hours. All this ahead of the all-important December US CPI print later today? The print comes out at 13:30 London time, and as you’ll be familiar with by now, repeated upside surprises in the inflation data have sent the year-on-year numbers up to multi-decade highs, putting significant pressure on the Fed. Indeed if you look at the monthly headline CPI reading, 7 of the last 9 releases have come in above the consensus estimate on Bloomberg. In terms of what to expect this time around, our US economists think that year-on-year CPI will rise to +7.0%, which will be the highest annual CPI number since 1982. And if that figure is realised, it would also mean that the real Fed Funds rate in December was around -7%, which for reference is lower than at any point in the 1970s, when the lowest the fed funds rate got in real terms was around -5%.
Over in equity markets, US indices were buoyed by rates rallying, paring back their initial losses as Powell spoke. The S&P 500 was on track for a 6th consecutive loss for the first time since February 2020, before recovering its poise and ending the day up +0.92%, it’s first day in the green since the first trading day of the year. Sector dispersion was wide, as energy (+3.41%) saw a noticeable outperformance as Brent Crude (+3.52%) closed above its pre-Omicron closing level for the first time, reaching $83.72/bbl, just as WTI (+3.82%) also posted a decent advance. Meanwhile tech stocks continue to be the beneficiary of the calm in rates following their slump last week, with the NASDAQ surging +1.41% and the FANG+ index gaining +1.53%.
European equities had a strong day themselves yesterday, although to be fair they were catching up with the rally late in the US session they’d previously missed out on, with the STOXX 600 up +0.84%. The moves were enough to put the DAX (+1.10%) and the CAC 40 (+0.95%) back in positive territory on a YTD basis, and the continued rise in yields helped the STOXX Banks index (+0.28%) match a 3-year high set last Friday. Speaking of yields, there was generally a move higher across Europe yesterday, with those on 10yr bunds (+0.7bps), OATs (+1.6bps) and BTPs (+2.0bps) all rising, although gilts (-2.0bps) were the exception.
Markets across Asia are seeing a significant rally this morning led by gains in the Hang Seng (+2.12%) followed by the Nikkei (+1.85%) and Kospi (+1.39%). Elsewhere, in China, the Shanghai Composite (+0.35%) and CSI (+0.36%) are trading in the green, after the nation's consumer and producer inflation both moderated leaving room for the PBOC to ease monetary policy. With the inflation remaining subdued, the possibility of a rate cut in China would put the PBOC on a divergent path with the US Fed. Data released earlier revealed that producer prices advanced a less than expected +10.3% y/y last month while consumer prices (a key gauge of retail inflation) increased +1.5% y/y down from 2.3% in November, also short of economists’ forecasts (1.7%). Looking ahead, equity futures are indicating a steady start in DMs with the S&P 500 (+0.06%) and DAX (+0.55%) contracts trading in positive territory.
Turning to Covid, there were further signs yesterday that the Omicron wave in the UK was easing, which is potentially significant more broadly in that it was one of the first places among the advanced economies to be affected, particularly in London, and given that it has seen fairly light social restrictions. Yesterday saw the number of reported Covid cases fall to the lowest since December 27, and in England the number of patients on a mechanical ventilator fell to its lowest in almost 3 months as well, which backs up the argument that Omicron appears to be a milder form of Covid relative to previous variants.
In more DB advertising, we’ve just published the latest edition of The House View, a compilation of DB’s macro and strategy views in slide format. You can find the link here. In addition, in a new Podzept podcast, Tim Rokossa, Global co-ordinator of Automotive research, and Luke Templeman, discuss the 2022 outlook for the global automotive sector. Here’s the podcast (link here) and the associated report (link here).
There wasn’t much at all in the way of data yesterday, though the NFIB’s small business optimism index for December in the US rose to 98.9 (vs. 98.7 expected).
To the day ahead now, and the aforementioned US CPI release for December will be the highlight. Other data releases include Euro Area industrial production for November and the US monthly budget statement for December. From central banks, the Fed will be releasing their Beige Book, and speakers include BoE Deputy Governor Cunliffe and the Fed’s Kashkari.
Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says “Economic Slack Now Absorbed”
Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says "Economic Slack Now Absorbed"
For once, the majority of forecasters was correct, and moments ago the Bank of Canada kept rates unchanged at 0.25, in line with that 24 of 31 analyst
For once, the majority of forecasters was correct, and moments ago the Bank of Canada kept rates unchanged at 0.25, in line with that 24 of 31 analysts expected. The bank also said that while it is keeping holdings on its balance sheet constant, once it begins rising interest rates, it "will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds."
In its statement, the Bank of Canada said that with overall economic slack now absorbed, "the Bank has removed its exceptional forward guidance on its policy interest rate" but the Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds roughly constant
Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.
Some more from the BoC:
The global recovery from the COVID-19 pandemic is strong but uneven. The US economy is growing robustly while growth in some other regions appears more moderate, especially in China due to current weakness in its property sector. Strong global demand for goods combined with supply bottlenecks that hinder production and transportation are pushing up inflation in most regions. As well, oil prices have rebounded to well above pre-pandemic levels following a decline at the onset of the Omicron variant of COVID-19. Financial conditions remain broadly accommodative but have tightened with growing expectations that monetary policy will normalize sooner than was anticipated, and with rising geopolitical tensions. Overall, the Bank projects global GDP growth to moderate from 6¾ % in 2021 to about 3½ % in 2022 and 2023.
On inflation, the BoC said that "CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation."
The central bank also said that it will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.
A redline comparison of the BoC statement:
Commenting on the move, Bloomberg's Ven Ram writes that this is a lot more dovish outcome from the Bank of Canada than one might have imagined. Not only did the central bank hold its rate, but it didn’t paint itself into a corner on when it may push the button: “Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.”
Add to that this guidance on balance-sheet runoff: “The Bank will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.”
Net-net this isn’t screaming, “Buy the loonie” and sure enough, in immediate reaction, the canada 2Y yields declined and the loonie weakened, dropping from 1.2560 before the BOC to 1.2640 before paring some of the losses, amid some trader disappointment that the bank did not hike.
* * * Earlier:
In what may be a teaser of what to expect from the Fed later today, the Bank of Canada rate decision is due at 10:00am EST followed by Governor Macklem press conference at 11:00am EST. While the bank is expected to leave rates unchanged, there is the risk of a surprise rate hike. Indeed, about a quarter, or 7/31 analysts, surveyed by Reuters expect a hike. If left unchanged, attention turns to guidance.
Below is a recap of what to expect from the BOC courtesy of Newsquawk
- The Bank of Canada is expected to leave rates unchanged at 0.25% although there is the risk for a hike with 7/31 surveyed analysts expecting a 25bp hike to 0.50% at the January meeting, ahead of the current BoC guidance for the middle quarters of 2022.
- If the rate is left unchanged, attention turns to guidance to see whether this is bought forward to the end of Q1 (ie March).
- Market pricing looks for rates to be left unchanged, although this has unwound heavily from last week which saw up to a 90% chance of a 25bp hike in January after the BoC survey and CPI data.
- The MPR will also be released, analysts at TD securities see 2022 growth being revised lower, while inflation is expected to be revised 0.1% higher for 2022 but revised down by 0.1% in 2023.
LIFT-OFF: The latest Reuters survey saw analysts generally believe the BoC will leave rates unchanged in January, although 7 of 31 surveyed expect a hike will occur. Therefore, the expectation for January is for rates to be left unchanged, although the risk of a hike is there. If the rate is left unchanged, attention will turn to its forward guidance, which currently looks for lift-off “sometime in the middle quarters of 2022”. If it is bought forward to the end of Q1, it will signal a March lift-off is coming. Analysts are currently split on whether the BoC will hike in March with 16/31 calling for rates to be left unchanged again, while the other 15 expect it will rise to 0.50% or more, however, all analysts noted the risk to the pace of rate hikes this year is that they come faster than expected. The median forecast is for the BoC to raise rates to 0.75% by the end of Q2 2022.
SURVEYS: The Business Outlook Survey sounded the alarm on inflation with 67% of firms expecting inflation to be above 3% over the next two years, although most predict it will return to target within one to three years. It also noted that demand and supply bottlenecks are expected to keep upward pressure on prices over the year ahead. However, the overall survey saw a continued improvement in business sentiment to see the indicator hit a record high, although it was held back by labour shortages and supply chain issues. Note, the Canadian labour market is back at pre-pandemic levels and has been for a while. A separate BoC survey showed consumer inflation expectations hitting a record high of 4.89% over the next year, noting most people are more concerned about inflation post-COVID than before, where consumers believe it is more difficult to control. Analysts at ING highlight that the latest survey saw respondents note they expect supply disruptions through H2 this year and that labour shortages are constraining output. ING write “where the economic outlook is robust, the jobs market is red hot and inflation is at generational highs, we see little reason for the BoC to delay tightening monetary policy.” Meanwhile, ING adds that Ontario has announced a three-step plan to allow a full reopening from COVID restrictions from the end of January “which should be the final green light for the central bank to hike rates 25bps”.
INFLATION: The latest CPI report saw the headline M/M and Y/Y metrics in line with expectations, although the core Y /Y measure saw a sharp rise to 4.0%, while the BoC eyed measures rose to 2.93% from 2.73%. Analysts at RBC, who expect the Bank to leave rates unchanged at this meeting, say “Inflation trends have evolved largely in line with the BoC’ s forecasts from the October Monetary Policy Report (4.8% vs actual 4.7% for Q4)”. However, this still shows price growth above the 2% target rate and RBC’s own tracking suggests not all that pressure can be explained by pandemicrelated distortions. As such, RBC expects rates to rise soon and believe the BoC will use this meeting to signal the start of lift-off.
MPR: The MPR will also be released, analysts at TD securities see 2022 growth being revised lower, while inflation is expected to be revised higher for 2022, before being revised marginally lower in 2023. In October, the MPR saw 2021 growth at 5.1%, 2022 at 4.3%, and 2023 at 3.7%. CPI was seen at 3.4% for 2021, while 2022 is expected to be revised higher to 3.5% (prev. 3.4%), and 2023 CPI is expected to be revised down to 2.2% from 2.3%. In the October MPR, the output gap was estimated at about -2.25% to -1.25% and is expected to close sometime in the middle quarters of 2022
Mainstream Suddenly Realizes Raising Interest Rates In A World Buried In Debt Might Be A Problem
Mainstream Suddenly Realizes Raising Interest Rates In A World Buried In Debt Might Be A Problem
Authored by Michael Maharrey via SchiffGold.com,
The Federal Reserve is talking about raising interest rates. But the US economy is buried under
The Federal Reserve is talking about raising interest rates. But the US economy is buried under piles of debt. I’ve been asking how this is going to work for months. Apparently, the question has finally occurred to the mainstream.
A CNBC article declared, “Fed rate hikes will intensify a global debt crisis, research warns.”
Well, yeah. Duh.
According to the study came from a UK non-profit the Jubilee Debt Campaign, debt payments rose in developing countries by 120% between 2010 and 2021. They are currently at their highest levels since 2001.
The sharp increase in debt payments is hindering countries’ economic recovery from the pandemic, the report suggested, and rising US and global interest rates in 2022 could exacerbate the problem for many lower income countries.”
The study and the CNBC article are really a pitch for debt cancellation, but their narrative swerves into an unpleasant truth for US policymakers. Raising interest rates in a world awash in red ink is going to be a problem. And not just for “developing countries.”
In December alone, the federal government spent $508 billion. The was the highest December spending level ever. Through the first three months of fiscal 2022, the federal government has already spent $1.43 trillion. That’s a record for the first quarter of any fiscal year.
Raising interest rates will drastically increase the cost of servicing all of that debt. And it will increase the cost of borrowing more money for the Biden spending coming down the pike.
In the fiscal year 2020, Uncle Sam spent $345 billion in net interest payments alone, despite near-zero interest rates. The nonpartisan Committee for a Responsible Federal Budget found that even a 2% increase in interest rates would cause net interest payments to rise to a whopping $750 billion. And this estimate was calculated before the passage of the American Rescue Plan and the Bipartisan Infrastructure Bill. That was followed up with a big surge in interest rates on US Treasuries. In other words, $750 billion underestimates the cost.
On top of that, American consumers are buried under debt. Consumer debt jumped 11% year-on-year in November. It was the biggest single-month jump in consumer debt in 20 years. Total consumer debt now stands at over $4.41 trillion. And that doesn’t include mortgages.
Revolving debt – primarily credit card balances – grew by a staggering 23.4% year-on-year in November. That was the biggest increase since 1998.
And that’s not all. Businesses and corporations are also leveraged to the hilt.
The year 2020 set a record for corporate debt issuance with $2.28 trillion of bonds and loans, comprising both new bonds and bonds issued to refinance existing debt.
All of this debt is a feature of the Fed’s loose monetary policy - not a bug.
The Federal Reserve and the US government have built a post-pandemic “economic recovery” on stimulus and debt. It is predicated on consumers spending stimulus money borrowed and handed out by the federal government or running up their own credit cards.
Now, the Fed is threatening to turn off that easy money spigot. How is that going to work? How will consumers buried under more than $1 trillion in credit card debt pay those balances down with interest rates rising? With rising rates, minimum payments will rise. It will cost more just to pay the interest on the outstanding balances.
Overleveraged companies have the same problem.
And so does the US government.
This does not bode well for an economy that depends on borrowing and spending to sustain itself.
The only reason Americans can borrow money is because the Fed is enabling them. It holds interest rates artificially low. That’s how the economy works. And that’s why I think the Fed will ultimately relent on any move it makes toward tighter monetary policy. As Peter Schiff put it, the Fed can’t do what it’s claiming it will do.
Futures Surge After Microsoft Reversal With All Eyes On Fed
Futures Surge After Microsoft Reversal With All Eyes On Fed
Yesterday, after Microsoft stock initially slumped despite beating across the board as the skeptical market latched on to even the smallest weakness to hammer the stock, dragging…
Yesterday, after Microsoft stock initially slumped despite beating across the board as the skeptical market latched on to even the smallest weakness to hammer the stock, dragging down both the Nasdaq and S&P futures close to session lows, we said that the reaction was premature and would reverse, as the earnings release did not include guidance and would promptly reverse once the company revealed its cloud guidance in its conference call a little over an hour later. Well, that's precisely what happened and after first tumbling as much as 5% after hours, the 2nd largest US company (MSFT has $2.2 trillion in market cap) reversed all losses and is now trading solidly in the green, sparking broader tech momentum, lifting the Nasdaq as much as 2.1% this morning and (briefly) helping traders forget that today at 2pm the Fed is expected to unveil a March rate hike and balance sheet runoff a few months later.
Indeed, contracts on the Nasdaq 100 led broad-based gains - which would have been gaping losses had MSFT failed to reverse late on Tuesday - as U.S. stock futures rallied, with investors bracing for the Federal Reserve’s decision and preparing for a slew of earnings from companies including Tesla, Intel and Boeing. Nasdaq 100 futures jumped as much as 2.1% while S&P 500 and Dow Jones futures also rallied. The VIX fell from a one-year high, snapping six days of gains. Elsewhere, the Stoxx Europe 600 rose 2% in the biggest jump in seven weeks. 10Y TSY yields rose to 1.79% with the Fed’s policy announcement in the limelight; the dollar was slightly higher, as was Bitcoin while Brent oil traded just shy of $90 on its way to triple digits.
Of course, the big event today is the Fed policy statement at 2pm ET and press conference 2:30pm, which are expected to ratify expectations for rate increases beginning in March
- Short-term interest rate futures price in just 1bp of rate-hike premium for January meeting but fully price in 25bp for March
- Commentary on shrinking the central bank’s balance sheet is also anticipated
We will have a detailed post on what to expect from the Fed shortly.
“We expect inflation to remain high and interest rates to rise more than investors are expecting today,” said Norbert Frey, head of portfolio management at Fuerst Fugger Privatbank. “A rising interest rate environment is leading to a revaluation of all business models and we think 2022 can be a year of value stocks.”
While equities have had had a rocky start to 2022 as bond yields rose with investors anticipate tighter policy from the Fed, while Russia-U.S. tension added to investor concerns. Now, strategists from Goldman Sachs Group Inc. to Citigroup Inc. are saying it’s time to buy the dip.
“Any further significant weakness at the index level should be seen as a buying opportunity, in our view,” Goldman strategists including Peter Oppenheimer wrote in a note on Wednesday.
In U.S. premarket trading, Microsoft Corp rose, with analysts positive on the software maker’s outlook for growth for its Azure cloud-computing services. Shares gained 4.1% in U.S. premarket trading after initially tumbling before the market heard the company's strong cloud guidance, with analysts positive on the software maker’s outlook for growth for its Azure cloud-computing services. Analysts also highlighted the company’s commercial bookings and a supportive IT spending backdrop. Texas Instruments shares also rose 4% after the chipmaker gave a first-quarter forecast that was stronger than expected, with analysts noting the company’s conservatism amid a still supportive demand backdrop. Texas Instruments also reported its fourth-quarter results. Other notable premarket movers:
- Cryptocurrency-exposed stocks in Europe and the U.S. are trading higher as Bitcoin kept regaining ground ahead of the Federal Reserve decision. Marathon Digital (MARA US) +6%, (RIOT US) Riot Blockchain +5%, (COIN US) Coinbase +3.4%.
- Electric vehicle stocks climb in U.S. premarket trading ahead of Tesla’s fourth-quarter results due Wednesday after the market close. Rivian (RIVN US) +3.5%; Tesla (TSLA US) +4.4%; Nikola (NKLA US) +3.6%.
- Moderna’s (MRNA US) stock valuation “makes a lot more sense” after more than halving since Deutsche Bank initiated in October, prompting the broker to upgrade the vaccine maker to hold from sell. Shares gain 4.6% premarket.
- Capital One (COF US) reported adjusted earnings per share for the fourth quarter that beat the average analyst estimate. Shares dropped postmarket, with higher expenses “the only wrinkle” in the bank’s quarter, according to Vital Knowledge.
- Stride (LRN US) shares gained 7% postmarket Tuesday after the technology-based education company boosted its revenue forecast for the full year. The guidance beat the average
Global stocks have shed about 7% in January, on track for the worst month since the pandemic roiled markets back in 2020. Some strategists are optimistic about the outlook following the declines.
“The growth-policy trade-off may be less favourable, yet we think a lot of bad news is now priced in,” Emmanuel Cau, head of European equity strategy at Barclays Plc, wrote in a note. “Starts of policy normalisation typically bring higher volatility but rarely terminate bull markets, although higher-than-usual P/E multiples mean equities are more rates-sensitive this time.”
In the latest developments involving Russia and Ukraine, president Joe Biden said he would consider personally sanctioning Vladimir Putin if he orders an invasion of Ukraine, escalating efforts to deter the Russian leader from war. In response, Russian Foreign Minister Sergei Lavrov signaled that Moscow will respond to any “aggressive” action by the U.S. and its European allies as Germany and France pursue efforts to broker a peaceful resolution to the tensions over Ukraine.
European equities rally, brushing off geopolitical tensions, with most indexes clawing back roughly 3/4 of Monday’s sharp sell off to rise over 2%. Europe’s Stoxx 600 adds as much as 2% with travel, energy, miners and autos leading what is broad sectoral support. Here are some of the biggest European movers today:
- Vestas Wind Systems shares rise as much as 6%, reversing an earlier decline, after guidance for 2022 was met with relief. Handelsbanken analysts said the guidance miss was unsurprising, and the market likely feared it would be worse.
- Other European renewables stocks -- which have been hit hard in the recent selloff -- gain after Vestas’ update, rebounding after declines triggered by Siemens Gamesa’s profit warning last week.
- Travel and leisure is the best-performing sector among Stoxx 600 groups on Wednesday. Airlines including Lufthansa and IAG lead gains, with the German carrier upgraded to buy at Stifel.
- AutoStore advances after being raised to buy at Citi. The upgrade follows a slump of more than 50% amid uncertainty regarding patent litigation and a broader sell-off in tech stocks.
- De Longhi rises as much as 8.9%, the most intraday since March 2021, after Equita upgrades to buy from hold, citing recent underperformance and more confidence in the company’s coffee business.
- Essity falls the most since Oct. 2020 after the Swedish hygiene products manufacturer reported weaker-than-expected earnings and announced further price hikes in 2022.
- Orpea shares continued their descent after its CEO was summoned to the French minister for elderly policy. The French nursing home operator also denied reports it had offered a journalist money to not publish a book critical of the company.
- Barry Callebaut shares fell, reversing earlier gains, after reporting 1Q sales. Citi noted “some more caution” on commodities amid waning supply of cocoa beans.
Earlier in the session, stocks in Asia were mixed after slumping across the board in the previous session, as investors awaited the Federal Reserve’s policy decision. The MSCI Asia Pacific Index was down 0.1%, on track to fall for a fourth day, with advances in communication services and financials offsetting losses in technology shares. Benchmarks in China, Hong Kong and Singapore were among the gainers, while Japan’s Topix Index fell deeper into correction territory. Asian equities have tumbled this month amid heightened volatility on the prospect of U.S. monetary-policy tightening, with the Fed expected to telegraph a March interest-rate hike on Wednesday. Worries over rising rates sent a gauge of the region’s tech hardware stocks to its lowest in months on Wednesday, with chipmakers TSMC and Samsung Electronics among the biggest drags. “There’s a lot of noise in the market right now, and I don’t think anyone’s confident that this is the bottom, because we aren’t sure about Fed policy yet,” said Kyle Rodda, analyst at IG Markets. Despite the broader drop in tech shares, Tencent advanced on dip-buying, helping to boost the Hang Seng Tech Index. The CSI 300 Index whipsawed to narrowly avoid entering a bear market
Fixed income takes a back seat. Curves adopt a modest bear steepening theme with gilts underperforming both bunds and USTs by 1-2bps. Eurodollars bear flatten a touch ahead of today’s FOMC meeting. Peripheral and semi-core spreads narrow with Italy, Belgium and France outperforming.
Treasuries are under pressure in early U.S. trade with U.S. stock index futures higher by 1%-2%, European benchmarks by 2%-3%, with travel, energy, miners and autos leading a broad advance. Front-end yields cheaper by more than 2bp with most curve spreads within 1bp of Tuesday’s close; 10-year yields around 1.785%, outperforming gilts by ~1bp. Focal point of U.S. day is Fed policy decision and Chair Powell news conference. Auction cycle pauses for Fed, concluding with 7-year notes Thursday. The stellar 2Y & 5Y auctions are underwater after stopping through (the 5Y produced record-low dealer award), There is no Fed POMO today. IG dollar issuance slate empty so far and expected to remain slim; Treasury auctions resume with $53b 7-year note sale on Thursday, following strong demand for 2- and 5-year notes earlier this week.
In FX, Bloomberg Dollar Spot is little changed but mixed price action across much of G-10. USD/JPY rises through 114, EUR/USD dips back onto a 1.12-handle. Commodity currencies trade well as crude futures drift back toward Monday’s highs.
Bitcoin extended its gains for the week, trading near $38,000.
In commodities, WTI adds 0.6%, regaining a $86-handle after the latest APIR report showed a draw in U.S. stockpiles and investors tracked tensions over Ukraine for signs the conflict may disrupt supplies. Brent climbs to about $89. Spot gold trades a tight range near $1,846/oz. Most base metals are well bid, lead by LME copper and tin; aluminum underperforms.
Looking at the day ahead now, the main highlight will be the aforementioned Federal Reserve decision and Chair Powell’s subsequent press conference, whilst there’s also a policy decision from the Bank of Canada. On the data side, we’ve got US new home sales for December, along with the preliminary December reading of wholesale inventories. Meanwhile earnings releases include Tesla, Abbott Laboratories, Intel, AT&T and Boeing.
- S&P 500 futures up 1.2% to 4,399.50
- STOXX Europe 600 up 1.8% to 467.79
- MXAP down 0.1% to 186.79
- MXAPJ little changed at 612.28
- Nikkei down 0.4% to 27,011.33
- Topix down 0.3% to 1,891.85
- Hang Seng Index up 0.2% to 24,289.90
- Shanghai Composite up 0.7% to 3,455.67
- Sensex up 0.6% to 57,858.15
- Australia S&P/ASX 200 down 2.5% to 6,961.63
- Kospi down 0.4% to 2,709.24
- German 10Y yield little changed at -0.08%
- Euro down 0.2% to $1.1284
- Brent Futures up 0.8% to $88.92/bbl
- Gold spot down 0.1% to $1,846.69
- U.S. Dollar Index up 0.15% to 96.09
Top Overnight News from Bloomberg
- Federal Reserve policy makers are poised to signal plans for their first interest rate hike since 2018 and discuss shrinking their bloated balance sheet as they seek to restrain the hottest inflation in nearly 40 years
- The Treasury market appears more likely to respond in a logical way to Wednesday’s Federal Reserve communications because of indications that the past week’s U.S. stock-market bloodbath cleared out a crowded camp of bets on higher yields
- The employment cost index, which Federal Reserve Chair Jerome Powell cited in December as a key reason for the central bank’s pivot to a more aggressive stance on inflation, is seen registering a fourth-quarter gain nearly on par with the record increase in the prior three months
- Lithuanian Central Bank Governor Gediminas Simkus warned that Europe’s economy would suffer a significant blow if tensions escalate further between Russia and Ukraine, urging politicians to step up efforts to deter hostilities
- OPEC and its allies are expected by delegates to stick to their plan and ratify another modest production increase next week as they try to satisfy rebounding oil demand
A more detailed look at global markets courtesy of Newsquawk
In Asian trading, APAC markets were subdued ahead of the FOMC and holiday-quietened conditions. Nikkei 225 (-0.4%) oscillated around the 27k level after record daily COVID-19 cases. KOSPI (-0.4%) faded opening gains with attention on earnings. Hang Seng (+0.2%) and Shanghai Comp. (+0.7%) were mixed as PBoC liquidity efforts and government support signals were offset as Evergrande default woes resurfaced.
Top Asian News
- Foreigners Cash Out of Key Asian Emerging Markets Before Fed
- China to Start Three-Year Crackdown on Money Laundering
- China Criticizes U.S. Diplomats Seeking Exit Over Covid Rules
- China South City Bonds Rally as Consent Given to Extend 2022s
European bourses are firmer in an extension of yesterday's upside, with the Stoxx 600 +2.0% on the session but still lower on the week. US futures are firmer across the board with the NQ, +2.0%, outpacing and benefitting from MSFT post earnings, +4.0% in pre-market. European sectors are all in the green with Travel & Leisure outperforming amid broker action while Oil & Gas is a relatively close second given crude action. EU antitrust decision against Intel (INTC) has been annulled in part by the EU General Court. Microsoft (MSFT) Q2 2022 (USD): EPS 2.48 (exp. 2.31), Revenue 51.73bln (exp. 50.88bln). Co. sees Q3 product revenue between USD 15.6bln-15.8bln and expects Azure revenue growth to increase significantly, while it guides Q3 rev. USD 48.5bln-49.3bln (implied) vs exp. USD 47.7bln. +4.0% in the pre-market.
Top European News
- Inflation Outlook No Reason for ECB to Change Track: Simkus
- Italy Asks Firms Not to Meet With Putin Amid Ukraine Crisis
- Finland ‘Wise’ to Sell Long-Maturity Debt Ahead of ECB Tapering
- Europe Travel Stocks Gain on Airlines Boost; Lufthansa Upgraded
In FX, Loonie loving risk recovery and WTI revival in run up to likely BoC hike. Aussie rebounds in absence of those away for a national holiday. Greenback stands firm awaiting something hawkish from the Fed. Kiwi hovering ahead of NZ CPI. -Pound pensive before Partygate findings are published. Rouble unable to benefit from Brent bounce as Russia begins big drills in Black Sea to keep geopolitical tensions elevated.
In commodities, WTI and Brent March futures have continued grinding higher despite quiet news flow as focus remains on geopolitics and the benchmarks also benefit from equity action. At best, WTI and Brent have surpassed USD 86.00/bbl and USD 89.00/bbl respectively thus far. Spot Gold remains contained amid relatively rangebound USD action while Silver is buoyed ahead of USD 24.00 /oz and touted resistance marks. US Private Energy Inventory Data (bbls): Crude -0.9mln (exp. -0.7mln), Gasoline +2.4mln (exp. +2.5mln),
Distillates -2.2mln (exp. -1.3mln), Cushing -1.0mln. Qatar's Emir is to meet US President Biden on Monday to discuss Afghanistan and contingency plans to supply natural gas to Europe in the event of a Russian invasion of Ukraine. Qatar Emir and US President Biden are to discuss additional Qatari gas supplies to Europe in the case of a Russian-Ukraine conflict at next week's discussions, via Reuters sources; Qatar has little spare gas for Europe as most gas is pre-sold.
- US State Department said the US hasn't seen the de-escalation that is necessary if diplomacy and dialogue with Russia is to prove successful, while US Department of Defense Spokesman Kirby said the US will not rule out adding further troops to the already 8,500 on alert.
- Ukraine Foreign Ministers says the proposals the US will send to Russia do not raise Ukraine's objections; subsequently, Moscow says received some answers to security guarantee proposals, but not in written form - awaiting further details.
- Ukrainian President Zelensky said the situation in the east is under control and they are working to establish that the meeting of Presidents of Ukraine, Russia, Germany, and France takes place as soon as possible.
- Russian navy has commenced large-scale training in the Black Sea, according to Ifax.
- UK Foreign Minister Truss, when question if they would sanction Russia's Putin, says they are not ruling anything out.
- Ukraine envoy to Japan said that they are fully committed to a diplomatic solution to the current tensions with Russia, while the envoy also stated that a full-scale war is very difficult to expect although they may see more localised conflict.
US Event Calendar
- 7am: Jan. MBA Mortgage Applications, prior 2.3%
- 8:30am: Dec. Advance Goods Trade Balance, est. -$96b, prior -$97.8b, revised -$98b
- 8:30am: Dec. Retail Inventories MoM, est. 1.5%, prior 2.0%; Wholesale Inventories MoM, est. 1.2%, prior 1.4%
- 10am: Dec. New Home Sales MoM, est. 2.1%, prior 12.4%; New Home Sales, est. 760,000, prior 744,000
- 2pm: FOMC Rate Decision
DB's Jim Reid concludes the overnight wrap
With markets awaiting today’s policy decision from the Federal Reserve, yesterday marked another volatile session that saw the resumption of the equity selloff as investor jitters remained at the prospect of monetary policy tightening alongside burgeoning geopolitical tensions. Indeed, in many ways it was a repetition of Monday’s session with a further bout of wild intraday swings. At the start, the S&P 500 sold off heavily after the US open to hit an intraday low of -2.79%, with the index back in correction territory. Then it recovered to actually move back into the green for a few minutes, before selling off in the last hour to finish the day down -1.22%, closing -9.18% off its all-time highs reached at the start of the year. With Fed policy so acutely driving risk assets in recent weeks, it sets up an interesting day of communications ahead for the FOMC.
On that front, the Fed are expected to telegraph the start of their latest hiking cycle today, and our US economists write in their preview (link here) that the meeting statement and Chair Powell’s subsequent press conference should confirm that lift-off in the policy rate is likely at the following meeting in March. It comes as the unemployment has now fallen back beneath 4% for the first time since the pandemic began, while CPI in December hit +7.0% year-on-year for the first time since 1982. Our economists’ baseline is for that March hike to be the first of 4 this year, although as they’ve written recently (link here) there is the tail risk of a more aggressive pace still. The market agrees: pricing liftoff for March and 3.96 total hikes through the rest of the year. Balance sheet policy will be of particular focus. Our US econ team believes the Fed will begin QT in Q3. The year-to-date selloff of real rates and equity markets began with the Fed surprising markets by how much they were already considering an early and aggressive use of QT to augment their tightening of policy, so any incremental information will be devoured. While it’s likely too early for the Fed to deliver specific QT details today, our economists believe it’s possible Chair Powell begins to socialise a range of potential QT outcomes to start the give-and-take involved with guiding market expectations. Also of interest will be whether Powell is asked about the possibility of a larger +50bps increase in rates at some point, which had been the topic of some speculation before the latest selloff should the Fed need to tighten financial conditions quickly.
Back to the equity selloff, and there wasn’t a consistent sectoral revival story to tell yesterday, with the volatility sending the VIX higher for a 6th consecutive session to 31.16pts, the longest run of gains in over a year. Tech ended the day as the worst performer, down -2.34%, after rallying in the middle of the session, and the NASDAQ finished the day down -2.28%. Energy (+3.96%) was the key outperformer on the other hand, followed by financials (+0.47%) as the only other sector that managed to finish the day higher. Those moves came as oil rebounded from Monday’s losses, with Brent crude (+2.24%) and WTI (+2.75%) both advancing. After the close we also got earnings from Microsoft, which beat analyst sales and earnings expectations. The stock was slightly higher in after-hours trading on the growth prospects of the company’s cloud computing services. Later today we’ll get Tesla’s earnings and Apple’s tomorrow.
Amidst the equity volatility, sovereign bonds were comparatively subdued again yesterday, with yields on 10yr Treasuries down a paltry -0.2bps to 1.77%. The yield curve managed to flatten, with the 2s10s slope down -4.8bps yesterday to 74.8bps, its lowest closing level in almost a month. This is one of a number of classic late-cycle indicators Jim mentions in the chartbook, and it’s worth noting that on average the 2s10s curve has flattened by around 80bps following the first year of a hiking cycle, so if the Fed does hike in March and the curve follows that historic playbook, we could be looking at an inversion within the next 12-18 months.
Overnight in Asia, equities are putting in a more mixed performance, with the Nikkei (-0.21%), the Kospi (-0.33%) and the Hang Seng (-0.14%) seeing modest falls, whilst the Shanghai Comp is up +0.14%. Futures are pointing to a more positive session in the US and Europe today however, with those on the S&P 50 (+0.20%) and the DAX (+0.49%) both moving higher.
Back in Europe, markets followed a very different playbook yesterday. Having not been open at the time of the late US recovery on Monday, European equities advanced across the board following their rout at the start of the week, and the STOXX 600 rose +0.71%. Meanwhile, with the ECB’s Governing Council not meeting until next week, sovereign bonds also diverged from the US, with yields on 10yr bunds (+2.7bps), OATs (+2.7bps) and gilts (+3.8bps) all moving higher on the day.
With tensions remaining high between Russia and the West over Ukraine, President Biden said in response to a question that the US would consider personal sanctions against President Putin in the event of a Russia invasion. Sanctions against heads of state are an extremely rare step, but the US and others have already threatened severe sanctions if an invasion took place.
On the data side, the Conference Board’s consumer confidence index for January fell a bit less than expected to 113.8 (vs. 112.2 expected). It came as the present situation reading rose to 148.2, but the expectations measure fell to 90.8. Separately in Germany, the Ifo’s business climate indicator in January rose to 95.7 (vs. 94.5 expected), marking the first increase in the indicator after a run of 6 consecutive monthly declines.
Finally, the IMF released their World Economic Outlook update yesterday, in which they downgraded their global growth forecast for 2022 to +4.4% (vs. +4.9% in October). That included cuts to the projections for both the advanced and emerging market economies, with the US and China among those seeing the biggest downgrades. Indeed, the US forecast for this year was cut to +4.0% (vs. +5.2% in October), and China’s was cut to +4.8% (vs. +5.6% in October). One marginal respite was that 2023 did see a modest upgrade, with global growth now projected at +3.8% (vs. +3.6% in October).
To the day ahead now, and the main highlight will be the aforementioned Federal Reserve decision and Chair Powell’s subsequent press conference, whilst there’s also a policy decision from the Bank of Canada. On the data side, we’ve got US new home sales for December, along with the preliminary December reading of wholesale inventories. Meanwhile earnings releases include Tesla, Abbott Laboratories, Intel, AT&T and Boeing.
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